September was a taper tantrum month for global equities. An extraordinarily rapid turnaround in economic activity around the world has caused an excess of demand over supply seemingly across the board. This has given an appearance of chaos and the ghost of inflation has been spotted everywhere. Even the Bank of England governor has warned that interest rates may need to be raised to control it.
Really? We don’t think so. Our view is that the global economy is rebounding strongly. Supplies and supply chains are stretched and the moderator or rationeer is the pricing mechanism. Rising prices for goods and services are signalling supply/demand imbalances. The solution is to increase supply. That will come if business feels confident enough via a capex expansion which increases the productive capacity and, hence size, of the economy. Happy days! That is what we all want. Putting up interest rates to restrain demand has the opposite effect. It adds cost, reduces demand, and demotivates capex, promoting a static economy. The price of money (interest rates) is governed by supply relative to demand, like everything else, not by absolute levels of demand.
In the US, the September 2021 Manufacturing Purchasing Managers Index (PMI) stood at 61.1%1, the 16th consecutive month of growth. (PMI’s2 are economic indicators derived from private sector companies and a reading above 50 is an expansion). It showed new orders, employment, and production growing; exports and imports growing and prices increasing. A recent McKinsey Global survey showed just over half of respondents in North America and Europe had increased investment in new technologies over 2020, and about 75% said they expected that to accelerate in the period 2020-24. Companies digitized activities 20-25 times faster than they had previously thought possible. All very vibrant.
And yet, at the time of writing, the 30-year US treasury rate stands at c.2.03%3. That implies adequate supply of money relative to reinvigorated demand. A good indicator of consumer price inflation is unit labour costs which have two inputs: wages and productivity. Production and non-supervisory workers in the US saw average hourly earnings grow almost 5% year-on-year in July and August for example. But if productivity also accelerates, unit labour costs, and so prices, can remain stable. And it is. Labour productivity growth in the US and the Eurozone averaged around 1% from 2013-2018 and has now leapt. In the US, it grew an average of 3% in the first half of 2021. Unit labour costs fell 0.8% during the same period4.
This suggests to us that the global economy is in the early stages of a vigorous upturn in demand and our exposure in the VT Downing Global Investors Fund to the basic materials and inputs needed to enable that has risen recently.
The VT Downing Global Investors Fund was launched in March 2020. Since launch, the price of F share class accumulation units has increased by 67.4% to the end of September 2021. In comparison, the IA Global Total Return returned 54.1% over the same period5.
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About Downing Fund Managers
Downing Fund Managers (DFM) is part of Downing LLP, a company with over 30 years’ experience and more than £1.4 billion AUM. DFM was founded in 2010 as a boutique investment house with a value-based style that favours a private equity approach to investing in public markets. The range of mandates covered by DFM now consists of five funds – all different from, and complementary to, each other. DFM are also committed to the Principles of Responsible Investment, which can make investments more rewarding by being profitable for our investors.
Downing LLP is authorised and regulated by the Financial Conduct Authority (FRN: 545025). Registered in England and Wales (No. OC341575). Registered Office: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
 Institute for Supply Management®, October 01 2021
 https://www.marketwatch.com/investing/bond/tmubmusd30y?countrycode=bx – as at 01 October 2021
 Source: FE Analytics – 25/03/2020 – 30/09/2021 Performance
Institute for Supply Management®, October 01 2021